Courts Reigning in What It Means to be a “Hacker” Under the Computer Fraud and Abuse Act

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Jackson Lewis e-discovery guru Ralph Losey has posted an article about the Computer Fraud and Abuse Act (“CFAA”) on his e-discovery blog ediscoverylawtoday. Losey posits that more courts may be turning to the minority application of the CFAA as applying only to acts of unauthorized access, as opposed to unauthorized use. As he states in part:

A majority of courts have to date construed the meaning of “unauthorized access” in the CFAA to include access for unauthorized purposes, such as to steal an employer’s information. They applied the anti-hacker statute even though the employee was authorized to access the computer system, just not for purposes of theft. Now a growing number of courts are stepping back from the expansive construction of what it means to be a “hacker” under the statute. They are instead limiting the CFAA to situations where the access to the computer itself was unauthorized, and disregarding whether or not the access was for a permitted use.

A recent case out of the District Court in Pittsburgh provides an example of this new trend, and includes a good discussion of the law. Carnegie Strategic Design Engineers, LLC v Cloherty, March 6, 2014.  Judge Eddy points out that there is a split in the Circuits on the issue, and then follows the minority view that the CFAA was not intended to convert disloyal employees into hackers. The plaintiff employer’s case was dismissed with prejudice because there were no allegations that the employee was not authorized to access the computer system, just allegations of improper purpose.

 

Pennsylvania Court Upholds Choice of Law Provision in Non-Solicitation Case Involving California Employee

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In another example of out-of-state employers utilizing choice of forum and choice of law provisions to bind California employees to restrictive covenants, the Pennsylvania Superior Court recently held that a Pennsylvania choice of law and forum clause was enforceable as against a California resident.

The case, Synthes USA Sales, LLC v. Harrison, involved a sales consultant, Harrison, who worked for Synthes in the medical device industry. Harrison signed a non-solicitation agreement in 2007 in which he agreed not to solicit Synthes’s customers for a period of one year after his employment ended.  The agreement contained a clause stating,

CHOICE OF LAW AND FORUM: This agreement will be governed by Pennsylvania law applicable to contracts entered into and performed in Pennsylvania.  I agree that this agreement can be enforced by any federal or state court of competent jurisdiction in the Commonwealth of Pennsylvania and hereby consent to the personal jurisdiction of these courts.

Harrison quit his employment on November 2, 2012, and started working in a similar capacity for a competitor. Within a half hour of giving his notice, Harrison filed an action for declaratory relief in the U.S. District Court for the Eastern District of California.  On November 15, 2012, Synthes filed a complaint in Pennsylvania seeking to enforce the agreement with a preliminary injunction.  Synthes also moved to dismiss the California action, apparently on the grounds that it involved an earlier 2005 agreement between the parties.  The California federal court dismissed the action and an appeal is still pending in the Ninth Circuit Court of Appeals.

Meanwhile, the Pennsylvania Court of Common Pleas dismissed Synthes’s action and applied California law. That court held that the choice of law provision, by its own terms, only applied to contracts “entered into and performed in Pennsylvania.”  The Superior Court reversed this holding. It applied the “last antecedent rule” and interpreted the limiting language of “entered into and performed in Pennsylvania” to define the type of law that would govern and not limiting which contracts were subject to the choice of law.  The court remanded for further proceedings.

This litigation offers important lessons in careful contract drafting and contract interpretation. It also highlights an increasing willingness of courts to enforce restrictive covenant agreements against employees in California, based on a choice of law, choice of forum and consent to jurisdiction provisions.  This trend was bolstered by the U.S. Supreme Court’s decision in Atlantic Marine Construction Co. v. U.S. Dist. Court for the Western District of Texas.

Criminal Prosecution for Employee Theft of Employer’s Documents May Proceed, New Jersey Court Rules

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Our colleague Jason C. Gavejian has written about an interesting case in New Jersey involving the criminal prosecution of an employee who took highly confidential documents from her employer to support her employment discrimination suit.  The decision distinguishes a 2010 New Jersey Supreme Court ruling in which the court held that an employee who copied employer records for use in a discrimination case may be insulated from discipline or termination.

Should a Non-Compete be Signed Before or After Employment Begins? Answer: It Depends

By Thomas A. Davis on

The variation among states when it comes to non-compete law is a source of frustration for many employers.  And sometimes, similar facts can lead to opposite results depending on the jurisdiction.  A recent decision from the Southern District of Alabama, holding that a non-compete can only be signed after employment begins, shows how Alabama law differs from states like Minnesota and Oregon, which require a restrictive covenant to be signed before the inception of employment in order for the employment itself to constitute consideration.

In Dawson v. Ameritox, Ltd., No. 13-0614-KD-M (S. D. Ala. Jan. 6, 2014), the Court denied a motion by Ameritox to enjoin its former employee, Dawson, from working for a competitor.  Dawson, a pharmacist, signed a non-compete with Ameritox on March 29, 2011 in connection with an offer to start employment on April 11, 2011.  In denying the injunction, the court signaled that the non-compete was not enforceable under § 8-1-1 Alabama Code 1975. Subsection (a) of Section 8-1-1 states that “Every contract by which anyone is restrained from exercising a lawful profession, trade or business otherwise than is provided by this section is to that extent void.  The court held that pharmacy was a “profession,” and refused enforcement on that ground.

But the court also held that the non-compete was not saved by section (b) of Section 8-1-1 which states in part, “one who is employed as an agent, servant or employee may agree with his employer to refrain from carrying on or engaging in a similar business and from soliciting old customers of such employer within a specified county, city or part thereof so long as the . . . employer carries on a like business therein.” (Emphasis added.) Relying on the holding from the Alabama Supreme Court in Pitney Bowes, Inc. v. Berney Office Solutions, 823 So.2d 659 (Ala. 2001), the Court held that subsection (b) does not apply “unless the employee-employer relationship exists at the time the agreement is executed.” That certainly tracks with the plain language of the statute which refers to “one who is employed.”

By contrast, in Minnesota (which does not have a statute on non-competes), case law has evolved such that mere continuation of employment is not considered sufficient consideration to support a non-compete, but an offer of employment will suffice. E.g. Sanborn Manuf. Co. v. Currie, 500 N.W.2d 161, 164 (Minn. Ct. App. 1993).  Strictly construing this principle, Minnesota courts have held, for example, that a non-compete signed on the first day of employment is not enforceable (absent other specific consideration, such as money). See Cannon Services, Inc. v. Robinson Outdoors, Inc., No. 04-1597 ADM/AJB (D. Minn. April 30, 2004) (Plaintiff did not show likelihood of success to enforce non-compete signed on first day of defendant’s employment).

In Oregon, a non-competition agreement between an employer and employee will be deemed void and unenforceable unless: (a) the employer informs the employee in a written employment offer received by the employee at least two weeks before the first day of the employee’s employment that a non-competition agreement is required as a condition of employment; or (b) the employer and employee enter into the non-competition agreement upon the subsequent bona fide advancement of the employee.  See ORS 653.295(1).  Note, however, that the foregoing statutory provision does not apply to non-solicit and non-service agreements or confidentiality agreements.  See ORS § 653.295(4)(b).

In Alabama, therefore, employers are generally advised to have non-competes signed on or after the first day of employment and continued employment may be considered adequate consideration. In Minnesota, however, employers must be careful to have non-competes signed before the first day of employment (often with the offer letter, as occurred in the Dawson case in Alabama) so that the offer of employment can serve as consideration.  And in Oregon, non-competes must be provided at least two weeks before employment begins. Employers must continue to mindful of state law variances, not only in the content of restrictive covenant agreements, but in the manner in which they are implemented.

Supreme Court Ruling on Forum-Selection Clauses Could Impact Non-Competes

By Clifford R. Atlas and Ravindra K. Shaw on

The use of forum-selection clauses in non-compete agreements received a possible boost from a recent U.S. Supreme Court ruling in the case of Atlantic Marine Constr. Co. v. U.S. District Court for the Western District of Texas, 187 L. Ed. 2d 487 (2013).  Cliff Atlas and Ravindra Shaw have writtten an article on the Jackson Lewis website explaining the decision.

Tennessee Continues its Trend of Enforcing Non-Competes

By Conrad S. Kee on

In a recent Tennessee case, Fidelity Brokerage Services LLC v. Melissa Clemens, No. 2:13-CV-239 (E.D. Tenn., Nov. 4, 2013), the Court entered a preliminary injunction prohibiting a former employee from soliciting customers or prospective customers she served while working for Fidelity, from soliciting Fidelity’s employees, and from using Fidelity’s confidential information.  As  we previously stated regarding the Dill v. Continental decision, the Fidelity case serves as another reminder that reasonably drafted restrictive covenants are very much enforceable in Tennessee when reasonable under the circumstances.

Ms. Clemens was an account executive for Fidelity and managed at least 424 households representing over $466 million in assets under Fidelity management.  Over the course of her 12-year employment, Ms. Clemens signed two employment agreements meant to protect Fidelity’s confidential information and prevent her from soliciting certain customers, prospective customers and employees.

In its decision, the Court made several noteworthy points:

  • Even though the agreement did not identify a geographic territory from which Ms. Clemens was restricted, the customer-based restriction (prohibiting her from contacting customers and prospective customers she served) did not render the agreement unenforceable.
  • Because Ms. Clemens was acting as “the face” of Fidelity, Fidelity had an interest in protecting the information generated from her relationships with is customers and potential customers.
  • Mere telephone numbers and addresses for customers are generally not considered confidential in Tennessee.  However, the “aggregate of information” which the employee had access to as a result of her employment with Fidelity, including customers’ confidential, personal, and financial information, could be considered confidential.
  •  A factor to assess whether a preliminary injunction should be entered is whether the moving party would suffer from “irreparable harm.”  Customer referrals and the loss of goodwill are difficult to calculate or prove, and may be used to assess the possibility of irreparable harm under Tennessee law.

Ohio Appellate Court Sporks Plaintiff in Plastic Cutlery Non-Compete Dispute

By Jackson Lewis P.C. on

An Ohio appeals court recently held that an employee did not breach his non-competition agreement by creating his own business in the same industry as his former employer, despite the fact that the former employee contacted clients of his former employer and began compiling an inventory during his restricted period.  Berk Enterprises, Inc. v. Polivka, 11th Dist. No. 2012-T-0073, 2013-Ohio-4961.  While the court of appeals held that the non-competition agreement was enforceable against the former employee, it determined that the specific language of the non-competition agreement did not prohibit the former employee from taking steps during the restricted period of the non-competition agreement to create a business that would compete in the same industry following the conclusion of the restricted period.

Facts

In 2007, Robert Polivka was hired as a salesperson for Berkley Square, a division of Berk Enterprises, Inc., an Ohio corporation that imports plastic cutlery for re-distribution throughout the United States.  In that role, Polivka had access to a variety of confidential information, including sensitive pricing and customer information.  As a result, Berk required that Polivka sign a non-competition agreement which stated that, for one year following the conclusion of Polivka’s employment with Berk, Polivka could not:

(i) engage in or carry on, directly or indirectly, any activity or business as an employee, independent contractor or agent, partner or otherwise, which provides, designs, develops, markets, invests in, imports, produces or sells any products, services, or businesses, which are the same or similar to, or competitive with those designed, developed, produced, marketed, invested in, provided or sold by BERK and its Affiliates (a ‘Competing Business’); (ii) have a direct or indirect interest in, or be Affiliated with, or render any services for, any person or entity engaged or carrying on, directly or indirectly, any Competing Business in the Territory; (iii) induce or attempt to induce any client, customer or supplier of BERK to reduce the business done by such supplier, customer or client with BERK and/or its Affiliates; (iv) divert or attempt to divert any of the BERK’S’s and/or any of its Affiliates’ business to Employee or to any party on whose behalf Employee is acting, either directly or indirectly, or solicit any of BERK’S and/or any of its Affiliates’ customers/suppliers with whom Employee dealt on behalf of BERK and/or any of its Affiliates during the time the Employee is employed by BERK; (v) solicit or induce any Employee, distributor, sales representative, agent or contractor of BERK to terminate his, her or its employment or other relationship with BERK or any of its Affiliates; or (vi) engage in any practice, the purpose or result of which is to evade the provisions of this Agreement or to commit any act that is detrimental to the successful continuation by BERK and its Affiliates of its/their business.

While still employed by Berk, Polivka and a partner set up a business called R & G Packaging, LLC.  This business was created to import and sell plastic cutlery and other disposable products similar in nature to Berkley Square’s line of products.  In July 2010, approximately a month after forming R & G, Polivka resigned from his position with Berk.

Immediately following his resignation, Polivka communicated with three Berk distributors that were part of his clientele with Berk.  According to Polivka, he contacted these individuals solely to inform them that he was resigning from Berk.  In December 2010, while still subject to his noncompetition agreement, a broker with whom Polivka had worked while employed by Berk emailed Polivka regarding a quote on products, and inadvertently copied a current Berk employee. Once Berk learned of the email, it filed suit against Polivka alleging that he breached his noncompetition agreement.  At the time Berk filed suit, R & G had not yet made any sales.

At trial, Polivka admitted that: (1) he and his partner created their new corporation before Polivka quit his job with Berk; (2) the new business would sell the same line of products as Berkley Square; (3) immediately after leaving Berk, Polivka telephoned and/or visited three Berk customers to inform them of his decision to quit; and (4) the new business was already compiling an inventory of the plastic cutlery by importing it from China.  As a result, the trial court determined that Polivka violated his non-competition agreement even though R & G had not made any sales during Polivka’s restricted period, and enjoined Polivka from competing with Berk for one year following the date of the decision.

Non-Competition Agreement Did Not Prohibit Polivka’s Conduct

On review, the Eleventh District Court of Appeals stated that, because R & G had not actually made any sales during the restricted period, the issue was whether the terms of the non-competition agreement prevented Polivka from preparing to compete with Berk.  Importantly, the court of appeals construed the terms of the non-competition agreement against Berk because it was a standard Berk agreement that was not the result of negotiations between Polivka and Berk.

Ultimately, the appellate court overruled the decision of the trial court and held that Polivka’s actions did not violate any of the express provisions of his non-competition agreement.  The court determined that the prohibited behavior in Polivka’s non-competition agreement did not cover investing in a new entity that had not made any sales because the agreement only covered activities which would have an immediate adverse effect on Berk’s business.  In reaching this conclusion, the court stated:

 Taken as a whole, the evidence presented by Berk, as the plaintiff in the underlying action, did not establish that appellant had actually started to compete with the company by trying to sell plastic cutlery to the same type of customers. Rather, the company was only able to prove that he was merely preparing to compete for the same business after the one-year period had elapsed. Since mere preparation did not conflict with any express provision of the non-competition covenant, the trial court erred in finding that appellant had violated the covenant.

Conclusion

Berk suggests that Ohio employers should ensure their non-competition agreements explicitly prohibit activities ancillary to competition, including the formation of a competing business, if they want these activities to be restricted.  Additionally, Berk serves as a reminder that non-competition agreements will typically be construed against employers, and that it is often difficult to prove that a former employee is actually competing in a particular industry.

Tennesse Court Rules Non-Compete Agreements Enforceable Against Two Former Executives

By Conrad S. Kee on

Shawn Kee has written on the Jackson Lewis website about a recent decision from the Court of Appeals of Tennessee, James F. Dill Jr. et al v. Continental Car Club, Inc., in which the Court held that a non-compete was narrowly enforceable under Tennessee law, although it declined to enforce a Florida choice-of-law provision which might have led to a broader restriction. Read more in Shawn’s post.

Either Way You Say it, It’s Unauthorized: Mass. Federal Court Declines to Dismiss CFAA Claim

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On November 12, 2013, A court in the U.S. District Court for the District of Massachusetts issued a decision concerning the ongoing debate about the meaning of “exceeding authorized access” under the Computer Fraud and Abuse Act. Moca Systems, Inc. v. Bernier, No. 13-10738-LTS (D. Mass. Nov. 12, 2013). MOCA Systems, Inc. filed suit against its former CEO and his newly formed company, Penley Systems, LLC, claiming Bernier improperly accessed MOCA’s computer systems to obtain confidential information and trade secrets for use at his new company.

MOCA alleged that within days of his termination, Bernier entered MOCA’s office, took a company-owned computer, downloaded MOCA’s trade secrets and confidential information, and then deleted a significant amount of information in an attempt to cover his tracks.

As this blog has previously noted, federal appellate courts are currently split on the interpretation of the term “exceeds authorized access” under the CFAA, and whether the term should be interpreted narrowly or broadly.  “Exceeds authorized access” is defined by the CFAA to mean, “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled to so obtain or alter.”   The phrase “without authorization” is not defined by the statute, however, and courts are currently divided on whether the phrase should be interpreted broadly or narrowly.

The court concluded that MOCA’s allegations supported a claim that Bernier had accessed the computer “without authorization” under either the narrow or broad reading of the CFAA, and denied Bernier’s motion to dismiss.  Declining to weigh in on the split in authority, the court noted:

Resolution of the pending motion, however, does not require the Court to determine which line of cases is better-reasoned, since the allegations in this Complaint differ materially from these cases and suffice under either standard.

In situations such as this, when an employer suspects foul play and theft of corporate resources, employers should consider making a forensic copy of the computer in question immediately.  Turning the computer on before making a forensic copy can create difficulties in investigating the employee’s activities because it can alter the metadata relating to downloaded and deleted files.

LinkedIn Notification Not Competition, Mass Court Holds

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The use of LinkedIn to notify professional contacts of a change in employment did not constitute competition. according to a recent Massachusetts ruling. In KNF&T v. Muller, No. 13-3676-BLS1 (October 24, 2013), the Massachusetts Superior Court denied a request for a preliminary injunction where an employer alleged that a former employee violated her non-competition agreement by, among other actions, using her LinkedIn profile to notify contacts of her new position. In denying the injunction, the court shed further light on the definition of competition and solicitation in the era of social media.

Charlotte Muller entered into a non-competition agreement with staffing company KNF&T which included prohibitions against competing with KNF&T and soliciting other KNF&T employees. Upon leaving KNF&T and taking a position with Panther Global/Total Clerical (a KNF&T competitor), Muller updated her LinkedIn page to reflect her change in employment. The update notified Muller’s 500 plus LinkedIn contacts, some of them KNF&T clients, of her new position.

In its motion for a preliminary injunction, KNF&T argued that the updated LinkedIn profile constituted “solicitation of business in direct violation of [Muller’s] non-competetion agreement.” KNF&T also attached a printout of Muller’s LinkedIn profile to its motion.

The court found “no evidence” that Muller had violated her non-competition agreement and denied the injunction. In a footnote, the court indicated it did not view the LinkedIn update as soliciting business competitive with KNF&T. The court further noted that, despite the updated LinkedIn profile, future violation of the non-competition agreement by Muller was not particularly likely.

The KNF&T decision comes on the heels of a First Circuit decision in Corporate Technologies, Inc. v. Harnett which held that an email blast to former clients announcing an employee’s new position constituted “solicitation.” The KNF&T decision indicates that LinkedIn updates may be treated differently than emails and that the definition of “solicitation” in the context of social media remains unsettled.

The use of LinkedIn was also a key issue in Eagle v. Morgan, No. 11-403 (E.D. Pa. March 12, 2013), where an employer was held liable for privacy claims after altering the LinkedIn profile of a former employee. KNF&T, along with the Eagle decision, shows that LinkedIn is becoming an increasingly prominent factor in non-compete litigation. Employers should therefore keep in mind the potential issues surrounding LinkedIn when drafting social media policies and non-competition agreements and when hiring new employees.

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